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News

Support for companies during the Coronavirus pandemic – claiming damages including lost profits

22.04.2020
Company: bpv Braun Partners s.r.o.

Compensation for damage including lost profits incurred due to the crisis measures, regulated in the Czech Republic under the Crisis Act, which took effect on January 1, 2001 (Act No. 240/2000). According to Section 36(1) of Act No. 240/2000, “The state is obliged to pay compensation for damage caused to legal entities and natural persons as a direct result of the crisis measures and exercises (Section 39(4)) performed under this Act. The state can only absolve itself of this responsibility if it proves that the injured party caused the damage to itself.”

State liability for damage incurred under the Crisis Act thus requires:

1) the existence of crisis measures,

2) the occurrence of damage,

3) a direct causal relationship between the occurrence of damage and the existence of crisis measures, and

4) the damage must not be caused by the injured party itself.

1) The “crisis measures” mean all measures designed to address the crisis and eliminate its consequences, including measures infringing on the rights and obligations of individuals. We can certainly include the government measures prohibiting free movement into this category, as well as the government measures ordering the closure of all stores other than those selling food, sanitary products, drugstores, pharmacies, etc.

2) We can characterize the occurrence of damage as an event that manifests on the injured party’s assets or monetary value of property rights and consists of loss of assets or incurrence of debt. Legal theory and practice divide the term “damage” (in the sense of property damage) into true damage, which is equal to the decrease in value of the injured party’s property, and lost profits, which can be characterized as what the injured party would have received if the damage had not occurred.

3) The damage must have been incurred as a direct result of the crisis measures. Only the damage incurred to injured legal entities and/or natural persons due to the government’s crisis measures should be covered, most often in connection with the decision to close all shops with stipulated exceptions. For a direct causal relationship it must be shown that the crisis measures were the cause of damage that would otherwise not have occurred.

However, please note that the claim to compensation for damage must first be made in writing at the relevant crisis management authority within six months of when the natural person or legal entity learned of damage that can be objectively assigned a financial value and reasonably taken to court, however, no more than five years after the damage was incurred, after which the claim expires. The claim can also be made in parts so it does not expire.

With regard to the crisis management authority where the claim must be made, this question has not yet been settled in legislation or jurisprudence, but in our opinion it will most likely be the Ministry of the Interior, or potentially the Ministry of Finance or Office of the Government of the Czech Republic. If the claim is not acknowledged, injured parties can seek to enforce it in civil courts (although the judicial proceedings will not be exempt from court fees).

When exercising the claim (typically by making a written filing, which has no set form) we recommend sending all documents that are available and prove the occurrence of damage and lost profits: invoices, confirmations, overviews of cancelled orders, lost customers, terminated contracts, contractual penalties paid, other penalties, etc., also stating the moment when the injured party learned of the damage.

The practical question has already arisen of whether the state will still be liable for damage incurred under the Crisis Act if the crisis measures were not issued pursuant to the Crisis Act in the form of governmental measures, but under the Public Health Act in the form of extraordinary measures of the Ministry of Health. We are of the opinion that it will, as a state of emergency was declared and is still in force, meaning that all measures addressing the crisis and remedying its consequences, including measures concerning the rights and obligations of individuals, are crisis measures in the meaning given in the Crisis Act, including the extraordinary measures from the Ministry of Health.

We would also point out, however, that the Crisis Act has never been applied to compensation for damage under similar circumstances. Discussions are already underway in professional circles regarding the interpretation of the Crisis Act and the related claims to compensation for damage. Many people are pointing out that the Crisis Act was intended more for local crisis situations such as flooding. The Czech government has even stated in this connection that it will not be paying compensation for damage for lost profits pursuant to the Crisis Act. Therefore we cannot exclude the possibility that courts will interpret the state’s liability under the Crisis Act restrictively (e.g. with reference to the public interest in public health).

Tags: Law | Finance |

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